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Will it be a win-win Proposition?

This case is written by Roma Israni1& Bakhtawar Shaikh2 , solely to provide for class
discussion. The author may have disguised certain names and other identifying information
to protect confidentiality.
This Publication may not be transmitted, photocopied, and digitalized, or otherwise
reproduced in any form by means without the permission of copyright holder. This Case
Study covers practical implications of Business theories, models, and structures. This is
written for Financial Reporting and Analysis.

Its June, the last month of Pakistans fiscal year, After analyzing financial
statements of NIB Bank, Mr.Shanawaz is looking disturbed because of banks
performance, so many questions raised in the mind of Mr. Shanawaz that
either the bank will perform well enough in future to support its operations
or not? Will the bank continue its strategy for longer period? Will the
economic indicators support the NIB bank for the future actions? He became
further confused when MCB Bank has given them offer of merger. Would this
attempt of merging will be beneficial for the NIB Bank? Either this merging
option will reduce its risks of bankruptcy or not? If NIB Bank will not follow
the MCB Bank offer of merging then what type of activities will make the
bank more profitable than the option of merging?
For pondering over these situations, he along with the banks higher
authorities recommendations have decided to hire external consultant for
individually analyzing these financial statements and who will provide
independent banks performance and also give suggestions for the future
actions.

About NIB Bank Pakistan:


NIB bank is the subsidiary of Bugis investments (Mauritius) Pte. Ltd that is a
wholly owned subsidiary of Fullerton Financial Holdings Pte. Ltd. NIB is
amongst the largest foreign banks of Pakistan having the extensive
1 Roma Israni is student of MBA program studying at IBA Sukkur. She is currently working on the case in order to
find some financial dilemmas regarding NIB Bank Pakistan. This case is solely written for Financial Reporting and
Analysis.2 Bakhtawar Shaikh is student of MBA program studying at IBA Sukkur. She is currently working on the
case in order to find some financial dilemmas regarding NIB Bank Pakistan. This case is solely written for Financial
Reporting and Analysis.

branching network in 52 cities of Pakistan. Also one of the largest corporate


entities with a paid up capital of PKR 103 billion. The NIB bank started its
operations in October 2003 with the merger of National Development
Leasing Corporation (NDLC) and the Pakistan operations of IFIC bank. From
the start bank grew well and acquired The Pakistan operations of Credit
Agricole Indosuez in 2004 and then On December 31st 2007, NIB
successfully merged with Pakistan Industrial Credit & Investment Corporation
ltd. (PICIC) and PICIC Commercial Bank ltd. (PCBL). With total assets swelling
up to PRs. 176.7 billion, advances to PRs 82.2 billion and deposits to an
amount of PRs 116.7 billion the merger resulted in formation the seventh
largest commercial bank in the country in terms of distribution network The
bank serves its customers through all financial and banking needs by having
170+ branches with online connections and 160 ATM. The bank satisfies its
customers by providing world class financial products and services by
different business units includes Retail Banking, Commercial Banking,
Corporate and investment banking, and Treasury Services. The main
stockholder of NIB is Temaesk through its wholly owned subsidiary Fullerton
Financial Holdings ltd. Basically Temaesk is a Singapore based Investment
Company incepted in 1974. NIB has a team of eight Board of directors. The
NIB aims to be a high performing bank admired for inspired employees,
satisfying customer services and for innovation. NIB bank CEO and director is
Mr. Atif R. Bukhari.

Business Portfolio:
NIB has the vast portfolio of financial products that includes Deposits,
Consumer loans, Wealth management, Trade Finance, Working Capital
Finance, Seasonal Finance, and Medium Term Finance, Transaction banking,
etc. And also the financial services through three different business units
like:
Retail banking: Consumer banking includes the services by a bank to
individual consumers, instead of companies, corporations or other banks.
Services
offered
include savings and transactional
accounts, mortgages, loans, debit, and credit cards.
Commercial Banking: Commercial bank is a division of a NIB bank, which
more specifically deals with deposit and loan services provided to
corporations or large/middle-sized business.
Investment Banking: It is division of NIB that assists individuals,
corporations, and governments in raising financial capital by underwriting or
acting as the client's agent in the issuance of securities.

Glimpse of the Financial Performance of NIB:


Since its inception in 2003 initially NIB performed well and grow itself by
acquisition and merger. However the financial statements of NIB shows the
instability of the profits and revenues the reason behind this is the economic
indicators as well as the management decisions. Loss making NIB bank
posted three years consecutive loss without declaring single penny of
dividend to its shareholders. 37-members group of minority shareholders
sent a letter to the Central Bank and request for hiring external auditor for
saving the Pakistani holders. The stakeholders having the claim of about RS
2 billion in the banks capital. Due to the hidden and highlighting weaknesses
bank had incurred loss of about RS 56.156 billion from 2010 to 2012.
Stakeholders blamed the bank management for the losses and considering
the administrative expenses as the contributing factor. Not only this, bank
has increased its expenditures by booking seven floors at the PNSC building
and is spending millions to reinvigorate the same building. And also bank has
increased its salaries expense without any productive results.
The Bank has not declared any dividend to its shareholders since it is handed
over by Temasek for six years back. Before acquisition of Temasek, bank was
used to give dividend and bonuses every year. The share price of the bank
was about RS 80 when it was PICIC Commercial Bank. In spite of claiming to
be largest paid up capital, bank has not raised its share price more than Rs.3.
share price is moving around RS 1.5 to RS 2.8.
After contacting the spokesman of NIB Bank, he admitted that losses has
occurred since the last five years but bank has improved its performance
from the first quarter of 2013, posted the profit before tax of about RS. 549
million compared to a loss before tax of RS 98 million in the year of 2012. He
further pointed out its current new management that it is improving its
policies and showing results. It is true that in previous years shareholders
has not received any share in the banks earnings but now they will not be
neglected because bank is now in position to increase its revenues. He
further said that about the extravagant expenditures that bank has increased
its revenues by 25% compared to its 10% expenditure. This is an economic
move for the bank because the new location is cheaper place than the old
place that was Pakistans most expensive place.

A tough decision to be made by NIB:


MCB Bank has showed interest in the acquiring assets of NIB Bank in order to
obtain an advantage in the competitive industry of Pakistan. The merger will
lead to the persistent work of operations share prices of both Banks. And this

will be done only with the permission of State Bank of Pakistan and also with
the permission of SECP and CCP. NIB Bank has officially announced that by
the merger of two banks stakeholders of the NIB Bank will remain the
investor of the MCB Bank. These are the only talks between the banks
nothing more than this declared by NIB management. According to some
analyst If the both banks come to mutual decision of having a merger of MCB
and NIB bank then this may be the win-win situation for both of the banks as
MCB will get the benefit from the vastly expanded branch networking of NIB
bank as MCB has adequate liquidity and capital buffer to grow itself through
risky assets and take a initiate to expand and face the competition more
strongly on the other hand NIB having lower capital adequacy of 12.5%, high
cost to income of 95% in CY15. With 21% of total loan book currently
classified, heavy cost structure, low interest rate environment and adverse
changes in the minimum deposit rate last year, the banks earnings and
business turnaround looks stretched.

Questions:
1. Analyze the performance of NIB bank through ratios by using
financial statements provided in the Exhibits.
2. Comment over the flaws in the NIB banks financial performance
after working through the ratio analysis.
3. What do you think would be the best decision for NIB? Whether to
go for merger or not?
4. What should be the future steps that management of NIB should
take in order to get stable profits in the coming years if it does
not go for merger?
EXHIBIT 1

Income Statement
NIB Bank

+ Total Interest Income


- Total Interest Expense
+ Net Interest Income
+ Trading Account Profit

2012
14,095.
1
11,125.8
2,969.3
1,059.8

2013
13,228.
1
9,878.1
3,350.0
998.1

2014
15,144.
9
11,248.9
3,896.1
1,102.7

2015
14,928.6
10,086.7
4,841.9
4,164.0

+ Commissions & Fees Earned


+ Other Operating Income
Net Revenue
- Provisions for Loan Losses
Net Revenue After Provisions

1,166.2
157.7
5,353.0
116.5
5,236.5

1,620.4
226.8
6,195.3
-751.0
6,946.3

1,616.9
10.2
6,625.8
1,536.5
5,089.3

1,420.9
3.0
10,429.8
199.2
10,230.5

- Non-Interest Expense
Operating Income or Losses
- Net Non-Operating Losses (Gains)
Pretax Income
- Income Tax Expense (Benefit)
Income Before XO Items
- Extraordinary Loss Net of Tax
- Minority/Non-Controlling Interests
(Credits)
Net Income/Net Profit (Losses)

5,413.1
-176.6
-617.1
440.5
178.4
262.1
0.0

5,636.5
1,309.8
-802.5
2,112.3
532.3
1,580.1
0.0

6,305.0
-1,215.7
-575.1
-640.6
423.3
-1,064.0
-443.3

6,388.8
3,841.8
10.0
3,831.8
1,390.8
2,441.0
-109.5

4.8
257.3

43.4
1,536.6

99.2
-719.9

15.9
2,534.6

EXHIBIT 2

Balance Sheet
NIB Bank
Assets
+ Cash & Near Cash Items
+ Inter banking Assets
+ Short-Term Investments
+ Net Loans
+ Total Loans
- Reserve for Losses on
Loans
+ Long-Term Investments
+ Net Fixed Assets
+ Other Assets
Total Assets
Liabilities & Shareholders
Equity
+ Demand Deposits

2011

2012

2013

2014

2015

7,411.5
16,711.0
39,386.4

7,282.0
4,788.6
75,139.9

7,681.5
3,142.2
53,768.3

7,767.0
8,582.7
47,558.3

60,861.5

71,585.9

84,489.2

94,879.8

82,026.0
104,583.
9

93,673.5
117,653.
6

9,602.9
3,693.8
86,364.6
110,669.
0
135,028.
0

23,627.7
4,832.9
2,722.9
22,898.8
154,825.
0

23,293.9
4,692.7
2,754.1
24,612.1
190,855.
2

22,557.9
1,728.4
2,879.3
27,567.8
178,793.
5

23,980.1
6,703.4
3,033.1
27,677.3
194,995.
3

24,359.0
6,678.9
3,086.4
24,947.1
245,042.
7

28,537.1

33,605.4

35,081.7

+ Interest Bearing Deposits


+ Saving Deposits
+ Time Deposits
+ Other Deposits

58,882.3
26,112.8
32,769.5
25,169.5

58,434.7
33,574.9
24,859.8
27,784.1

69,697.3
40,747.7
28,949.6

65,146.4
38,948.7
26,197.7

84,051.8
3,158.9
2,574.2
51,376.4

141,161.
Total Liabilities
3
+ Total Preferred Equity
0.0
+ Minority Interest
0.0
103,028.
+ Share Capital & APIC
5
+ Retained Earnings & Other
Equity
89,364.9
Total Equity
13,663.7
154,825.
Total Liabilities & Equity
0
Source: Annual reports of the bank

86,218.8
4,875.6
5,193.3
80,171.9
0.0
176,459.
6
0.0
0.0
103,028.
5
88,632.9
14,395.6
190,855.
2

98,234.4
9,516.0
3,836.9
51,506.7
0.0
163,094.
0
0.0
0.0
103,028.
5
87,329.1
15,699.5
178,793.
5

98,751.8
9,091.6
3,271.7
66,948.1
0.0
178,063.
1
0.0
0.0
103,028.
5
86,096.3
16,932.2
194,995.
3

+ Customer Deposits
+ ST Borrowings & Repos
+ Other Short-Term Liabilities
+ Long-Term Borrowings
+ Other Long-Term Liabilities

74,835.8
41,684.5
33,151.4

109,917.
6
23,058.3
4,105.4
89,872.3
0.0
226,953.
5
0.0
0.0
103,028.
5
84,939.4
18,089.2
245,042.
7

EXHIBIT 3

Statement of Cash Flows


NIB Bank
Cash From Operating Activities
+ Net Income
+ D&A and Provision for Loan
Losses
+ Other Non-Cash Adjustments
+ Changes in Non-Cash Capital
Cash From Operations
Cash From Investing Activities
+ Disposal of Fixed Assets

2012

2013

2014

2015

257.3

1,536.6

-719.9

2,534.6

703.7
1,178.4
1,622.5
1,839.
9

-121.9

2,187.2

-971.3
1,071.7
-628.2

-851.5
1,635.3
1,019.
4

835.7
2,497.7

90.7

72.8

32.9

1,554.7
2,427.
3

11.5

+ Increase in Investments

-130.1
34,580.
8

+ Decrease in Investments

0.0

+ Change in Loans
+ Other Investing Activities
Cash From Investing Activities

369.5
212.1
34,096
.4

Cash from Financing Activities


+ Dividends Paid

-0.4

+ Capital Expenditures

-447.8

-599.5

0.0
23,623.
8

0.0

-450.6
36,633.
7

4,152.5
18,758.
6
774.9
14,357
.8

0.0
11,100.
8
321.3
47,852
.3

0.0

0.0

11,122.
1
4,197.2

22,761.
6
0.0

0.0
0.0
0.0

-1.7
0.0
0.0
25,296.
8
415.9

8,380.1
151.8
15,038
.3

Cash from Financing Activities

35,110
.4

-1.4
24,239.
8
0.0
3,992.8
0.0
0.0
13,793.
3
97.1
14,343
.6

15,331
.2

Net Changes in Cash

-825.9

66.5

-46.1

+ Change in Short-Term Borrowings


+ Increase in Long-Term Borrowings
+ Decrease In Long-Term
Borrowings
+ Increase in Capital Stocks
+ Decrease in Capital Stocks
+ Change in Deposits
+ Other Financing Activities

29,488.
6
0.0
-1.6
0.0
0.0
5,622.2
1.6

215.1
-203.2

48,472
.6
3,047.
5

Source: Annual reports of the bank

Exhibit 4.
Projected consolidated statements after if the merger
takes place.

PROJECTED CONSOLIDATED INCOME STATEMENT


NIB BANK

Mark-up / return / interest earned


Mark-up / return / interest expensed
Net mark-up / interest Income
Provision against non-performing loans and advances
Provision / (reversal) for diminution in the value of investments
Bad debts written off directly

Net mark-up / interest income after provisions


NON MARK-UP / INTEREST INCOME
Fee, commission and brokerage income
Dividend income
Income from dealing in foreign currencies
Gain on sale of securities - net
Unrealized gain / (loss) on revaluation of investments classified as heldfor-trading
Other income
Total non-mark-up / interest income
Total markup plus non-mark-up income
NON MARK-UP! INTEREST EXPENSES
Administrative expenses
Other provisions / write offs
Other charges
Total non-mark-up / interest expenses
Share of (loss)/ profit of associates
Profit / (loss) before taxation from continuing operations
Taxation Current
- Prior years
- Deferred

2016
147373
21
100866
90
46506
31
199229
184639
2248
38611
6
42645
15
142093
1
191231
357056
400778
7
-14731
41582
60038
56
10268
371
618481
9
141402
96877
64230
98
-13473
38318
00
207359

2017
150714
57
112488
71
38225
86
153650
1
-11561
2421
15273
61
22952
25
161686
9
73483
587181
509014

89578
28761
25
51713
50
609609
8
140376
66075
63025
49
490574
64062
5
215001
10851

1,183,4
31 197477
1,390,7
90 423,329

Profit gloss) after taxation from continuing operations


DISCONTINUED OPERATIONS
Profit from discontinued operations - net of tax
PROFIT/(LOSS) AFTER TAXATION

2,441,
010

109524 443.257
2,550,
1,063,
534
511

PROJECTED CONSOLIDATED STATEMENT OF FINANCIAL POSITION


NIB BANK
2016
ASSETS
Cash and balances with treasury banks
Balances with other banks
lending to financial institutions
Investments
Advances
Operating fixed assets
Intangible assets
Deferred tax assets net
Other assets
Assets held for sale
LIABILITIES
Bills payable
Borrowings
Deposits and other accounts
Sub-ordinated loans
Liabilities against assets subject to finance lease
Deferred tax liabilities
Other liabilities
Liabilities held for sale
Owners equity
Share capital
Reserves
Discount on issue of shares

1,063,
954

2017

10052543
1645086
1599044
96023597
110668994
3086446
890491
9359609
7157979
4558914
245042703

8063675
586418
7699646
59670691
93673494
3033057
2926075
9992164
9350081
194995301

2576216
85676741
130399643
4195516

2740528
62750894
105102800
4197195

3463013
642415
226953544

3271665
178063082

103028512
997582
-45769623

103028512
474123
-45769623

Accumulated loss
Shareholders' equity
Surplus on revaluation of assets - net

-40416118
17840353
248806
18089159
245042703

-42432340
15300672
1631547
16932219
194995301

PROJECTED CONSOLIDATED STATEMENT OF CASH FLOWS


MCB BANK
CASH FLOWS FROM OPERATING ACTIVITIES
Profit / (loss)
Less: Dividend income

Adjustments for non-cash Items


Depreciation
Amortization
Impairment charge on tangible fixed assets
Gain on sale of securities net
Gain on sale of operating fixed assets net
Gain from insurance against loss of fixed assets net
Fixed assets written oft
Provision against non-performing loans and advances
Bad debts written off directly
Provision / (reversal) for diminution in the value of investments
Unrealized loss / (gain) on revaluation of investments classified as
held-to-trading
Other provisions / write offs
Share of profit of associates

(Increase)/decrease In operating assets


Lending to financial institutions

2016
2017
IN RS (000)
402913
6 -107897
-191231
-92743
383790
5 200640
311847
324637
27941
400778
7
-8780
-64
8619
199229
2248
184639

309133
341516

-729629
-37907
-162
153650
1
2421
-11561

14731
141402
-1948
280328
6
103461
9

-21558
140376
-548290

610060
2

557213

980840
780200

Net investments in held-for-trading securities


Advances
Other assets (excluding advance taxation)
Increase /(decrease) In operating liabilities
Bills payable

-853935
172013
76
200160
6

Deposits and other accounts


Other liabilities

-164286
229258
47
252968
43
406995

Income tax paid

395469
15
-353261

Borrowings

Net cash generated from / (used in) operating activities


CASH FLOWS FROM INVESTING ACTIVITIES
Net investments in available-for-sale securities
Net investments in held-to-maturity securities
Net investments in associates
Dividend received
Payments for capital work in progress
Acquisition of property and equipment
Acquisition of intangible assets
Sale proceeds of property and equipment disposed off
Recovery from Insurance company against loss of assets
Net cash (used in) / generated from investing activities
CASH FLOWS FROM FINANCING ACTIVITIES
(Redemption) / receipt of sub-ordinated loans
Dividend paid
Receipt from non-controlling unit holders PICIC Mutual Funds
Net cash generated from financing activities
Net increase / (decrease) in cash and cash equivalents Cash and
cash equivalents at beginning of the year Cash and cash
equivalents at end of the year
(Redemption) / receipt of sub-ordinated loans

391936
54
366582
38
24504
321120
191231
-272189
-169470
-8935
11468
181
365603
28

-1,679

0
367686
131864
49
154551
2
-122135
11,244,
221
215069
-457435
827648
5
-257708
853419
3

912752
0
497503
1
773898
93336
-327379
-270795
-1284
72780
1030
449407
5

4,197,1

Dividend paid
Receipt from non-controlling unit holders PICIC Mutual Funds
Net cash generated from financing activities
Net increase / (decrease) in cash and cash equivalents
Cash and cash equivalents at beginning of the year
Cash and cash equivalents at end of the year

-45
415,934
414,21
0
3,047,5
36
8,650,0
93
11,697,
629

95
-22
203,168
3,994,0
05
-46,113
8,696,2
06
8,650,0
93